Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 

TIPPING POINTS

FLOWS & LIQUIDITY

 

CAN A STOCK MARKET DISCONNECTED FROM THE ECONOMY BE MAINTAINED? 

 
There is little dispute amongst long term market professional that equity markets have disconnected from the economy. Yesterday, yet another investment legend Jeremy Grantham went on record that in his estimation we are in the midst of the fourth major bubble in his lifetime. Knowing Bubbles never last we asked the question in this month’s LONGWave whether this time was different? The short answer is; Yes!
 
  • FREE MARKETS can not disconnect from markets on a permanent basis. They can on a short term basis normally referred to as a “Bubble”.
  • CONTROLLED (‘Nationalized’) MARKETS can disconnect from the economy on a permanent basis. They in fact are no longer freely trading markets but rather pre-determined and price controlled trading of financial instruments.
This bubble (often referred to as the “Everything” Bubble was with us prior to the Covid-19’s crushing market drop, but has shown itself with the degree of bounce from its March lows as being different! The reason is that it is being driven by US Federal Reserve (with assistance from other major global central banks) as a monumentally excess liquidity driven market. I won’t debate here whether this is in fact required after the greatest Global Demand / Supply shock in history, but rather point out the fact that it is what has, and is currently causing the market to rise and become disconnected from the economy. 
 
So, the question remains will it be sustained?  The answer lies in the changing rate of the Global Liquidity Proxy!
 
We layout in the video and show below how the equity markets have reconnected with the Global Liquidity Proxy. The sole question is whether this rate will be be maintained, increased or decreased, when changes will occur and by how much?  We address this in this month’s 47 chart LONGWave video. [Spoiler Alert: The answer is NO]
 
  The Question That You Must Honestly Answer To Yourself is Whether Financial Markets Are Now “Free” or Are They Being Manipulated  and Effectively “Nationalized”?
 
SITUATIONAL ANALYSIS
    • MARKETS ARE DISCONNECTED FROM THE ECONOMY
      • Markets closed last week at a red flag screaming 151% market cap to GDP for the S&P 500 while the Whileshire 5000 was at 163%.  There is no history, none, that shows valuations above 150% market cap to GDP are sustainable. None.
      • Small Business has been crushed and a recent report from Azio, a major small business bank survey indicated that 47% of the small business owners surveyed said they anticipate shutting down, and 41% said they are looking for full-time work elsewhere. 
      • Forecasts are roughly $142 for the S&P 500 at the moment for 2020. Even if profits jump to just north of $160 which would be near 2019 profits, we have forward P/E multiples now already well 20x  – valuations leaves little to chance of being even close to historically reasonable.
        • ll this assumes corporate tax rates do not move higher – something that would happen should Biden defeat Trump and the Dems sweep Congress. 
        • Then there is the expectations of Covid-19 containment plus vaccines that are ready to go and inoculate tens of millions of people rapidly; which seems difficult given how poorly testing has gone.
      • An engineered “V” Shaped recovery in stocks does not mean a “V” shaped recovery in the Economy.  Demand destruction is enormous. The CBO Estimates it will Take 10 Years Just to Get Back to Even
      • BofA’s latest Fund Manager Survey, which polled 223 participants with $651 billion in AUM, showed the vast majority of financial professionals remain incredibly bearish on the global economy. Respondents do not expect global manufacturing PMI to rise back above the contraction level of 50 until 4Q20.
      • The supply-side story in Asia has yet to be revived because the demand story in Europe and North America is offline. Without Western demand, reviving Asian factories will not be possible; thus, world trade won’t rebound. It could take several years or more for global GDP to recover back to even 2019 levels.
      • The gap between current prices and discounted present value of likely future cash flows is the highest ever.
         
         
        MARKETS HAVE ‘RECONNECTED’ TO THE GLOBAL LIQUIDITY PROXY
         
        SINCE THE MID MARCH 2020 LOWS THE GLOBAL LIQUIDITY PROXY HAS RECONNECTED WITH GLOBAL STOCKS

FOLLOWING DETAILED ANALYSIS IS SUBSCRIBER CONTENT ONLY

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